The other day, I met two individuals — a retiree who had most of his investments in bank fixed deposits and a working professional who was heavily into short-term stock trading. The retiree compared his investments to his friends invested in stocks and was glad that he did not lose his money! The working professional, on the other hand, compared his investments to others trading in the market and was disappointed that he could not make as much money! Why do people behave so differently?
You would know the answer to this question if you had watched the recent Olympics. Each event has three winners — gold, silver and bronze medallists. The individual who wins gold is obviously delighted. But who do you think is happier between the silver and the bronze medallist?
To answer this question, two psychologists documented the facial expression of all the medal winners in an earlier Olympics. And guess what they found? The bronze medallist is much happier than the silver medallist. Why?
The bronze medallist knows that she was lucky enough to win at least a medal. This makes her happy. The silver medallist, on the other hand, knows that she narrowly missed winning a gold medal. The thought of missing gold makes her sad. Psychologists call this behaviour counterfactual thinking. It refers to how we perceive events could have otherwise turned out!
The important point is that the attitudes of the silver medallist and the bronze medallist are neither right nor wrong! Appreciating what you have gives you a sense of satisfaction, which is what the bronze medallists tend to do. Feeling of regret, that the silver medallists experience, gives the thrust to do better next time. While this attitude could lead to positive outcome in sports, it may not be the same with investments. When you look at the profits that you missed and feel miserable, you may be tempted to take more risk the next time around. And you could end up with more losses that you can actually bear!
The way you react depends on how the outcome impacts you. When you behave like the bronze medallist, you are rational, realising that you would have been worse-off. Brain areas that are related to logical thinking such as your prefrontal cortex may be activated during such a process. When you behave like the silver medallist, you are emotional. Your mid-brain dopamine neurons may be activated, leading to regret and prompting you to become more aggressive! The truth is that we do not always behave like a silver medallist or a bronze medallist. Depending on how a particular situation affects us, we switch between the two!